Episode #17: The 80-20 Rule
In this episode of Machine Shop Talk, Ian Sandusky from @Let’s Machine talks about the 80-20 rule and how it applies to your machining business.
The 80-20 rule, also known as the Pareto principle, is a simple, yet universally applicable principle that states that 80% of any given consequence or result is typically generated by 20% of the causes. It is a pretty general rule that applies to a multitude of situations in both life and business. So does it apply to a machining business and how can machine shop owners interpret and use the rule to their advantage?
According to the rule, 80% of the profit of any job shop typically comes from 20% of their customers. Conversely, 80% of your problems and headaches will also likely come from 20% of your customers. What’s important to realize is that those 20%s are almost never the same, so the 20% of customers that are keeping your machine shop healthy and profitable are almost never the same 20% that will cause problems.
According to Ian, it’s important to keep this principle in mind as it will help you focus time, energy, and resources only on customers that are worth it. In particular, as you understand which type of customers belong to the “good 20%” and which ones belong to the “bad 20%”, you’ll be able to identify which type of customers it’s better to chase, and in general be better prepared on how to allocate your precious and limited time.
Do you agree with Ian? Have you ever heard about the 80-20 or have you ever applied it to your machining business? Share your opinion in the comments.
And if you want to learn more about the 80-20 rule, here are some recommended books: The 80/20 Principle: The Secret to Achieving More with Less, Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers and Pareto’s Principle: Expand your business with the 80/20 rule.
Stay tuned for more machining videos!